Smart shopper: Brazilian steel giant Gerdau, a family business at heart, is growing fast abroad.

In Brazil, where companies have in recent years been gobbled up by foreign multinationals, steel company Gerdau is the exceedingly rare domestic group that has itself become a multinational by taking over foreign firms. And its appetite for acquisitions has extended across the Americas.

Gerdau's 26 mills make so-called "long" products--concrete-reinforcing bars (known as rebar), girders and wire rod for civil construction. It has become a global giant mainly through foreign acquisitions, beginning with the 1980 purchase of Uruguayan steel maker Laisa. In the following two decades, it bought Aza in Chile, Sipsa and Sipar in Argentina, Courtice Steel and MBM Steel in Canada, and finally Ameristeel in the United States in 1999, for US$262 million.

That purchase pushed Gerdau to No. 25 from No. 50 among the world's steel makers (it's No. 13 today) and gave it control of the second-largest U.S. rebar producer. Subsequent takeovers of small U.S. and Canadian steel makers gave Gerdau mills in Florida, North Carolina, Tennessee, New Jersey, Georgia, and Canada. Gerdau recently consolidated North American operations with a September 2004 agreement to acquire what it did not already own of long-steel mills in Texas, Iowa, Kentucky and Minnesota from North Star Steel, part of Minnesotan conglomerate Cargill, for $266 million.

Gerdau also expanded its presence into a fifth South American country by agreeing in December 2004 to pay $77 million in debt and equity for control of two Colombian steel makers, Diaco and Siderurgica del Pacifico from their major shareholders, The Latin American Enterprise Steel Holding, a Miami venture capital fund, and Grupo Mayaguez in Cali, Colombia.

At the center of the growth strategy is 68-year-old CEO Jorge Gerdau Johannpeter who, along with his three brothers, has run the company from headquarters in Porto Alegre in southern Rio Grande do Sul state since 1983, holding just over 50% of the company stock. Johannpeter and two of his brothers have adjoining offices in a former nail factory, one that their great-grandfather, Joao Gerdau, opened in 1901 after emigrating front Germany. That plant evolved into the modern steel-making giant through the acquisition of Brazilian steel plants since the 1940s.

The fourth brother's office is in Rio de Janeiro, at Gerdau's distribution center. "We're not just any family business, but a fourth-generation family business, which adds up to lots of experience," says Johannpeter.

Gerdau made most of its foreign acquisitions as it approached a 50% share of the long-products market in Brazil and had little available to buy domestically. To grow abroad, Gerdau decided to buy mills in the geographic vicinity of potential foreign clients.

Johannpeter, a stocky, forceful-looking man who keeps a low profile, cultivates an image of cautiousness. But he's a savvy and ambitious businessman with a keen sense of timing--as well as an accomplished equestrian and owner of thoroughbred horses that compete in world-class steeplechase events. "Knowing the right moment to make an acquisition is like knowing exactly when to command your horse to jump an obstacle in a steeplechase course," he says. "If your timing is just a bit oft, it can mean the difference between success and failure."

Driving the company's foreign acquisitions is the fact that long-steel products are logistically costly to export. "To increase your network of foreign clients you must produce the steel in their geographic regions," Johannpeter says. "We bought North Star Steel because it has operations throughout the central United States, not where Ameristeel has them, in the eastern and southeastern part of the country. So, with the acquisition, we can supply clients all across the central and eastern half of the United States."

Gerdau's North American operations, which accounted for 45% of its $7.38 billion in sales in 2004, have made it the fourth-largest steel maker in the United States after U.S. Steel, Nucor and International Steel group. Acquiring North Star in late 2004 has added almost 2 million tons of annual capacity to the close to 13 million tons Gerdau produced before the deal. As such, the group's North American operations will in 2005 account for close to 50% of its sales, says Johannpeter. Gerdau's Brazilian operations last year accounted for 55% of the group's sales.

Gerdau's operations in South America outside Brazil accounted for just 4% of the group's sales in 2004. Behind the group's recent purchase of the Colombian mills, however, is the same logistics strategy that fueled Gerdau's other foreign purchases: Buy mills in many different regions to bring products closer to potential clients, reducing logistic difficulties and freight costs. "We bought the two Colombian mills not just for logistics reasons but because they have a leading 45% stake in Colombia's long-steel market, and because Colombian steel consumption is growing at a rate of 6% to 7% a year, twice the rate of the economy, South America's third-largest," says Carlos Petry, Gerdau Group's senior vice president.

Prior to 1994, there were 10 steel companies in Colombia, four of which were controlled by Grupo Mayaguez, a conglomerate with origins in the sugar cane business. This happened in part as a result of Diaco's strategy of buying steel companies in order to close them, thus trying to create a monopoly for itself, competitors say. "Diaco bought steel companies in order to keep the steel market for itself, but we've all grown at the cost of the defunct companies," says Maurice Armitage, president of Siderurgica de Occidente (Sidoc) in Cali, which has a 15% domestic market share. "Diaco alone paid for the companies it closed down."

According to media reports, Sidoc--one of the countries most efficient steal companies, and union-free to boot--could be in Gerdau's sights. But Armitage says that his plan is to compete regardless of whether Gerdau enters the country, as Sidoc remains a competitive company able to face big challenges. "If we sell, what can I do?" he says. 'Although, I admit that if they offered us $100 million I wouldn't be able to sleep that night."

Johannpeter says that Gerdau will continue to buy. He singled out the United States, Mexico, Ecuador, Peru and Venezuela as countries where it might buy assets in the future. "In Europe, where there's been such massive steel-making consolidation that very little growth potential exists, we aren't even a player. Nor are we a player in Asia. So why buy European and Asian assets and be equal in size to no one there?" Johannpeter says. "It makes far more sense to increase our market share in the United States where we're a major player, where there's market-growth potential, as well as a civil construction boom. Just fly over any U.S. city and you can see it sprawling in all directions."

Johannpeter rules out, however, following in the footsteps of the Netherlands' Mittal Steel, the world's largest steel producer, which started out making long steel in the 1970s but in the 1990s jumped into higher-value flat steel, which is used to make cars and household appliances. "Since there's still lots of consolidation room in long products, that's where we'll focus our acquisitions," he says.

Steel-sector analysts say it's less caution than knowing the limits. "Gerdau buys foreign steel makers, like Ameristeel or North Star, which are either underperforming or in economic trouble. Then it capitalizes and expands them, making them more competitive and financially sound. And, in the case of the U.S. market, Gerdau has done these turnarounds just in time to cash in on the boom in the U.S. civil construction sector," says Pedro Gaudi at Banco ABN AMBO Real in Silo Paulo. "Gerdau isn't cautious. Look at all of its foreign acquisitions. It's ambitious, but without over-reaching and leveraging itself too far."

Gaudi figures that one measure of Gerdau's operational cash flow was $1.80 billion in 2004, meaning the group could erase its $1.60 billion in debt in less than a year, if it chose to. Gerdau is so well capitalized that it paid for all of North Star and half the cost of its Colombian mill purchases with its own capital. (It used bank financing to buy Ameristeel.)

Johannpeter says foreign financing would likely be a part of future acquisitions in North America. Since the group's purchase of Ameristeel and the two Canadian mills, financing costs there have dropped 30%. "Each time we have increased our asset and cash-flow presence in North America we have improved our risk perception there and have thus reduced our financing costs there," he says.

Having North American assets also gave Gerdau a financial hedge on the Brazilian economy during the late 1990s recession and the economic malaise from 2001 to 2003. While those zero-growth periods left non-exporting Brazilian companies like Gerdau with no escape from the stagnant domestic market, Gerdau's North American mills continued to spin cash abroad, reducing risk.

Management is known for exacting production standards and product quality standards that serve as benchmarks for local competitors. "We can't always meet the benchmarks set by the top German and Japanese steel mills, but our goal is to do everything possible to try to match them," Johannpeter says.

The company is also exacting with its suppliers. "While we supply oxygen to Gerdau's mills either via cylinders or directly, via pipeline, Gerdau is always pushing us to build pipelines to more of its mills because this is a cheaper and more reliable means of their getting gas than via cylinder," says Domingos Bullus, South America president of White Martins, the No. 1 industrial gas supplier in the Americas. "And when we agree to complete the pipeline by a specific date we must comply because Gerdau doesn't renegotiate deadlines."

Deadlines. Because Gerdau's Brazilian mills are spread throughout the country, they are close to virtually all of its clients. The focus on logistics means that clients don't have to tie up capital keeping steel stocks high. It also insures quick delivery times, especially for clients like Construtora OAS, a builder of bridges, tunnels, ports and airports that faces tough project deadlines. "Because we have construction projects all over Brazil and because we are sometimes given a very short amount of time to complete them, we need a supplier with quick delivery times," says OAS operational director Andre Python. "Gerdau, which has mills all over Brazil, has got its logistics so well down that delivery times can, in urgent situations, be as short as three days."

Gerdau plans to continue to invest $740 million in its North American operations between 2005 and 2007 and $2.40 billion in Brazilian operations during the same period. In May, it opened a mill in southeastern Silo Paulo state and plans to expand operations in neighboring Minas Gerais state. "We must continue to capitalize our businesses, not only abroad, but in Brazil," Gerdau says. "This country, last year, began coming out of three years of economic stagnation and there is a lot of repressed domestic steel demand that we intend to supply."

MICHAEL KEPP, RIO DE JANEIRO

ANDRES F. VELASQUEZ, CALI